The Information Channel of Asset Purchases

Gaetano Gaballo and Carlo Galli

No 21730, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study central bank asset purchases (APs) in bond markets where rational investors face position limits and learn from private signals and market prices. APs affect information aggregation, altering the informativeness of prices and their sensitivity to fundamentals through an information channel distinct from risk-premium effects. Consistent with this mechanism, we find that U.S. Federal Reserve APs strengthened the pass-through of labor market news to Treasury yields. Dispersed beliefs and position limits also provide a microfoundation for the optimality of APs.

Keywords: Central bank asset purchases; Quantitative easing; Information aggregation; Price informativeness; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: D83 E43 E44 E58 G14 (search for similar items in EconPapers)
Date: 2026-07
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